Indonesia May Increase Benchmark Rate for Fifth Straight Month

By Arijit Ghosh and Michael Munoz

Sept. 4 (Bloomberg) -- Indonesia's central bank may raise its benchmark interest rate for a fifth straight month to tame the fastest inflation in almost two years.

Governor Boediono and his seven colleagues will increase the policy rate by a quarter point to 9.25 percent, according to 23 of 28 economists in a Bloomberg News survey. Five expect no change. The board of governors meets in Jakarta today.

Indonesia's economic growth unexpectedly accelerated in the second quarter amid rising overseas sales by the world's largest palm oil producer and thermal coal exporter. That may ease policy makers' concerns that higher borrowing costs will damage Southeast Asia's biggest economy.

Improving domestic consumption is ``likely to give some comfort to Bank Indonesia to have higher interest rates,'' said Enrico Tanuwidjaja, an economist at Oversea-Chinese Banking Corp. in Singapore. ``The rupiah will continue to be a subject of close surveillance in order to keep imported inflation from seeping further into the economy.''

A 1.3 percent decline in the rupiah in the past month may also prompt the central bank to increase borrowing costs and attract overseas investors to Indonesian assets. The currency rose 0.1 percent to 9,207 against the dollar yesterday.

Consumer prices rose 11.85 percent from a year earlier last month, after increasing 11.9 percent in July. Wholesale-price inflation accelerated to 34.7 percent in June, the fastest pace in nine years.

Festival Season

Central banks across Asia have been raising borrowing costs as higher food and commodity prices stoke inflation in the region. The Bank of Thailand increased its benchmark rate for a second consecutive month on Aug. 27 to 3.75 percent. Bangko Sentral ng Pilipinas has raised the rate it pays banks for overnight deposits three times in 12 weeks.

Prices in Indonesia may rise this month as the country with the largest Muslim population prepares to celebrate Id-ul-Fitr in October to mark the end of the fasting month of Ramadan.

The sources of inflationary pressures have shifted ``to the demand side of the economy'' as the festival season approaches, said Alexander Sugandi, an economist at Standard Chartered Plc in Jakarta.

A policy rate of 9.5 percent is ``adequate'' to keep price gains within the central bank's inflation target of 6.5 percent to 7.5 percent next year, Deputy Governor Hartadi Sarwono said in an interview on Aug. 8.

Still, a decline in commodity prices since the end of the second quarter may slow economic growth. Palm oil futures have tumbled 44 percent from a record 4,486 ringgit ($1,303) a metric ton in March amid concerns that global supply may exceed demand and as funds cut commodity investments.

Overseas sales from Indonesia rose 25.5 percent in July from a year earlier to $12.55 billion. That compares with a 34.9 percent increase a month earlier.

The following is a table of economists' estimates:

Indonesia BI Rate Estimates
---------------------------------------------------------
                           Sept.    Oct.    Nov.    Dec.
Firm                            4       8       6       4
---------------------------------------------------------
Median                      9.25%   9.50%   9.50%   9.50%
% Estimates at Median         82%     74%     75%     70%
Average                     9.21%   9.38%   9.39%   9.43%
High                        9.25%   9.50%   9.50%   9.75%
Low                         9.00%   9.00%   9.00%   9.00%
Number of Estimates            28      19      20      20
---------------------------------------------------------
ATR-Kim Eng Capital         9.00%   9.00%   9.00%   9.00%
Bahana Securities           9.25%   9.25%   9.25%   9.50%
Bank Central Asia           9.25%   9.50%   9.50%   9.50%
Bank Danamon                9.25%   9.50%   9.50%   9.50%
Bank Intl Indonesia         9.25%   9.50%   9.50%   9.50%
BNI Securities              9.25%   9.50%   9.50%   9.75%
Capital Economics Ltd.      9.25%      --      --      --
Citi                        9.25%   9.50%   9.50%   9.50%
Credit Suisse               9.25%      --      --      --
Danareksa Securities        9.00%   9.00%   9.00%   9.00%
DBS Group                   9.25%      --      --      --
Forecast Ltd.               9.25%      --      --      --
HSBC                        9.25%      --   9.50%   9.75%
Ideaglobal                  9.00%   9.00%   9.00%   9.00%
Indo Premier Securities     9.25%   9.50%   9.50%   9.50%
ING Groep NV                9.00%      --      --      --
Lehman Brothers             9.25%      --      --      --
LippoBank                   9.00%   9.00%   9.00%   9.00%
Macquarie Capital Securit   9.25%   9.50%   9.50%   9.50%
Moody's Economy.com         9.25%   9.50%   9.50%   9.50%
Morgan Stanley              9.25%      --      --      --
OCBC Bank                   9.25%   9.50%   9.50%   9.50%
PT. Mega Capital            9.25%   9.50%   9.50%   9.50%
Reuters IFR                 9.25%   9.50%   9.50%   9.50%
Standard Chartered          9.25%   9.50%   9.50%   9.50%
UBS                         9.25%      --      --      --
UOB Group                   9.25%   9.50%   9.50%   9.50%
Westpac Banking             9.25%   9.50%   9.50%   9.50%
-----------------------------------------------------------

To contact the reporters on this story: Arijit Ghosh in Jakarta at aghosh@bloomberg.net